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Key Points

Motilal Oswal's latest financial report predicts a challenging first half for Indian banks with declining Net Interest Margins. The report suggests that benchmark rate reductions will compress lending yields across banking institutions. However, strategic measures like CRR reduction and phased deposit rate adjustments are expected to provide relief in the second half of the financial year. The banking sector is projected to maintain a robust 11.1% earnings CAGR from FY25 to FY27.

Key Points: Motilal Oswal Warns Bank Profits to Dip in H1 FY26

  • Bank NIMs expected to compress due to benchmark rate reductions
  • Private sector banks projected 2.5% YoY PAT decline
  • Public sector banks forecast 4.8% YoY PAT growth
  • CRR cut and deposit rate reduction may provide relief in H2
3 min read

Profit of Indian banks to decline in first half of FY26, recovery expected in second half: Motilal Oswal

Motilal Oswal forecasts bank Net Interest Margins will decline in first half of FY26, with recovery expected in second half due to strategic interventions.

"NIMs to decline sharply during 1H; expect trends to improve from 2H onward - Motilal Oswal Report"

New Delhi, July 3

The net interest margins (NIMs) of banks in the country are expected to come under pressure in the first half of the financial year 2025-26 (H1FY26), according to a recent report by Motilal Oswal.

However, the report projects that the trend may improve in the second half of the year.

The report stated that the decline in NIMs during the first half will be driven by a reduction in benchmark interest rates, which is likely to lead to a compression in lending yields across banks.

It stated, "NIMs to decline sharply during 1H; expect trends to improve from 2H onward: With a reduction in benchmark rates, we estimate lending yields to compress across banks".

On the other hand, the funding costs for banks tend to adjust with a lag, even though most banks have already reduced savings account (SA) and term deposit (TD) rates. Due to this mismatch, NIMs are expected to stay under pressure in H1FY26.

There will be variations in the impact across different banks, depending on how much of their loan book is linked to the repo rate and the speed of rate transmission.

As a result, the report expects a double-digit decline in NIMs in the first quarter of FY26 (1QFY26E).

However, the report also pointed to some positive developments in the second half of the year. A phased reduction in deposit rates and a 100 basis points cut in the Cash Reserve Ratio (CRR), effective from September 2025, are expected to improve liquidity in the banking system.

These steps are likely to provide some relief to banks' margins in the latter part of the year.

In terms of financial performance, the report estimated that Net Interest Income (NII) for the banks under coverage will see muted growth of 1.7 per cent year-on-year (YoY), while declining 0.6 per cent quarter-on-quarter (QoQ).

Pre-Provision Operating Profit (PPoP) is expected to decline 2.4 per cent QoQ, but increase 3.3 per cent YoY.

Private sector banks are estimated to witness a 2.5 per cent YoY decline in Profit After Tax (PAT), with a 2.8 per cent rise on a quarterly basis. Meanwhile, public sector banks are projected to see PAT grow by 4.8 per cent YoY but fall 11.7 per cent QoQ.

Overall, the report outlined that PAT to remain broadly flat YoY with a decline of 4.5 per cent QoQ. Looking ahead, it projects an 11.1 per cent compound annual growth rate (CAGR) in earnings for the banking sector over FY25 to FY27.

- ANI

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Reader Comments

S
Shreya B
As a small business owner, I welcome lower interest rates if it means cheaper loans! 🎉 But banks need to pass on the benefits quickly to borrowers, not just adjust deposit rates downwards. The lag in transmission is always frustrating for common people.
A
Aditya G
Motilal Oswal reports are usually accurate but I feel they're being too optimistic about H2 recovery. Global economic conditions remain volatile and our banking sector isn't insulated from that. We should prepare for extended pressure on margins.
P
Priya S
Good analysis but missing one key point - how will this affect home loan borrowers? With repo rate cuts expected, will banks reduce EMI amounts or just extend loan tenure like they usually do? Need more transparency in banking practices.
V
Vikram M
The 11.1% CAGR projection for FY25-27 seems ambitious given current challenges. Banks need to focus on digital transformation and cost optimization to achieve this. PSBs especially have lots of room for operational efficiency improvements.
K
Kavya N
As a fixed deposit investor, this news worries me 😟 Banks keep reducing deposit rates while inflation remains high. Where should middle class park their savings to get decent returns? RBI needs to balance borrower and saver interests better.

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